Fiber Optics Wins, Routing Loses in Needham Cloud Think Piece

By Tiernan Ray

Henderson discusses a raft of cloud computing and SDN startups in the report.

Needham & Co. analyst Alex Henderson, who covers shares of Ciena (CIEN) and JDS-Uniphase (JDSU) in the fiber optic market, and Juniper Networks (JNPR) and Cisco Systems (CSCO) in the networking field, today offers up a 12-page think piece titled “teaching elephants to dance” about the implications of cloud computing for the phone companies.

Henderson opines about who will be the winners and losers among the “dance instructors” who help those fumbling elephants.

The discussion involves mention of a raft of privately-backed startups, including Zscalar, Puppet Labs, and Cumulus Networks.

According to Henderson, Verizon Communications (VZ), Japan’s NTT-Docomo, Deutsche Telekom (DT), and other service providers, are rapidly trying to “virtualize” their networks to compete with Amazon.com (AMZN), Google (GOOG), and other new-style data center providers who are going “over-the-top” to compete with traditional managed and hosted services.

The core data center virtualization is occurring rapidly and much faster than many expected. Companies ranging from Verizon to Deutsche Telekom to NTT are moving rapidly to a virtualized architecture based on commercial off the shelf components where the applications are abstracted away from the hardware they are running on. Sound familiar? It should, as this is exactly what occurred with private cloud over the last decade. Service Providers want the same low cost generalized hardware, the same per application virtualization and application isolation, and the same on demand capacity flexibility enterprises have been demanding for the same reasons. It lowers costs and improves agility. In the enterprise arena, this is called virtualization, and in the Software Defined Data Center in the Service Provider Market this is called Network Function Virtualization. Not surprisingly, Service Providers are seeing the same need for flow-based traffic as enterprises and as a result, Service Providers are also integrating Software Defined Networking into the architectural vision. The transition to NFV and SDN was dramatically highlighted by AT&T recently with their announcement of the Domain 2.0, which specifically stated their goal of moving to a virtualized, NFV and SDN based design based on COTS components and hardware and rejecting the legacy of OSMINE compliance and traditional telecom standards. We believe the choice of Tail-f and MetaSwitch as domain leaders punctuated the massive shift in the thinking of AT&T. When we wrote about Tail-f at last year’s Interop, virtually no one in the investment community had ever heard of them. Yet, here they are at the center of AT&T Data Center strategy.

He notes the efforts of some carriers to build new kinds of “cloud to cloud” links, such as BT, whose efforst he highlights in a slide (click for larger image):

Overall, cloud computing of the kind Amazon and Google offer will take over one third of IT by 2020, he notes:

The immediate consequences of all that will be more distributed data centers, writes Henderson, and the rise of technologies such as carrier-grade ethernet:

Broadly speaking, we expect a Data Center based services delivery from scaled out Data Centers with globally distributed content allowing local access and processing. Conventional designs based on centralized access enablement, authorization, and security are likely to give way to highly distributed approaches. Each application will likely reside in its own virtualized network with its own vSwitching, vRouting, vADCs, vSecurity (application isolation). Carrier-Grade Optical Ethernet provides high band width flattened pipes into the enterprise, residential and wireless users. It should go without saying; it is almost certainly an all Ethernet based network with full meshed topologies. We see the optical plane absorbing much of the layer 2 processing control and we see routing becoming more and more absorbed by the virtualization layer.

As far as winners and losers, optical vendors will be in a good position he thinks — presumably Ciena and JDS-Uniphase, given he has Buy ratings on both stocks, though he doesn’t say so specifically; router vendors, on the other hand, are most threatened by all this, he thinks, without specifying who, though he has Hold ratings on both Juniperand Cisco:

Optical and Component Companies are major beneficiaries. Network-as-a-Service players should emerge as big winners. Orchestration and control plane software companies ranging from Vello to Puppet Labs should emerge as critical enablers. We think many branded IT companies are hurt by these trends, with the routing players in the most difficult position. We also think APM/NPM and Visibility Fabric and meta-data based diagnostics such as Splunk and Extra-Hop are big beneficiaries. The “DPI” companies if they can virtualize smoothly should also be well positioned.

Henderson includes a graphic of the new-style metro optical rings:

He also digs into the details of the movement known as ‘Network-as-a-Service (NaaS):

The shift to cloud-centric deliver models is also driving the rapid emergence and the massively disruptive transition to Network as a Service (NaaS) platforms. Perhaps the best example of this is Zscaler, but there are numerous companies such as Cloudflare, Aryaka and Pertino positioning into the NaaS market. We recently caught up with Zscaler at the RSA security trade show. The head of IT of United Airlines was presenting its reasons for choosing Zscaler for its operations. First, we were impressed that such a senior IT manager of United would take time to present at a tradeshow for an IT vendor. Second, we were highly impressed with their presentation and the savings they are achieving by realizing the benefit of distributed cloud based services delivery. Zscaler allows United Airlines to avoid hair-pinning all its traffic back to United’s data centers in order to provide user access, security and content to its employees globally. Pretty soon when you log into any United computer in any United travelers club globally, you will be served from the distributed Zscaler cloud.

Henderson includes a graphic of one instance of SDN implementation as NaaS:

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.